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Crafting insurance for the new brewery industry

It’s no secret that people like having choices whether it's the style of clothes they wear, the type of food they eat, or the kind of beer they drink. But, in fact, it wasn’t long ago that “choice” in the world of beer was almost nonexistent. In 1979, there were only 44 breweries in the United States, a post-prohibition low. Not only that, the majority of U.S. breweries only produced pale lager beers, very similar in style. As time went on, more and more people realized they had a choice regarding beer. They didn’t need to buy their beer from one of the large companies – they could make their own. And they didn’t need to be restricted to the styles of beer that the large brewers thought were best. They could brew stouts, IPAs, lagers– different beers to fit different tastes. Those who were especially skilled at brewing could sell their concoctions to others, thus increasing choice. These new brewers opened breweries and began to produce their beer at a higher rate. Craft brewing was born.

In case you were wondering, it caught on. By the mid-1990s, there were over 500 craft breweries in the United States. As of 2012, that number had exploded to 2,401, but wasn’t nearly finished. As of 2015, there were 4,225 craft breweries and counting.1 While the craft brewing market share held steady at around 2.5% in the early 2000s, business began to pick up in the mid-2000s. Currently, craft beer has a 12.2% share of the beer market.2 By 2020, it is expected that this will grow to more than 20%.3 As with any growing industry, it’s important for brewers and their insurance companies alike to understand the risks.

Small size, large risks

Craft breweries are known for being small. The craft brewer brews less than 6 million barrels of beer per year with many brewing much less than that amount.4 One subset of “craft brewers” is microbreweries, which brew less than 15,000 barrels per year. The size of these breweries greatly increases the impact of an unexpected event. If something bad happens to a brewery this size, it may result in the stoppage of production of one of its products or worse, closure of the entire brewery. In addition to being small, craft brewers are defined as being independent, meaning that the majority of them (around 75%) are owned only by the brewer themselves.5 As with closely held businesses of any kind, this poses additional risk to the breweries. Small businesses of any kind are more volatile than larger businesses because an injury, illness, or other incident involving a large stakeholder has significantly more impact on the company.

The craft brewing market contains many unique liabilities and combinations of more traditional liabilities. Craft brewers and their insurance providers need to make a distinction between craft breweries and related industries so brewers can choose the right coverage and insurance companies can know what to offer these unique clients.

Some in the insurance industry have already seen the need for specialized craft brewery coverage. There are a few “craft brewing” specific insurance providers on the market that have recognized this need and developed programs to educate craft breweries on what coverages they need and what exactly is provided in those coverages,6 and, of course, to sell them an insurance package.

The craft brewing industry is often considered to be related to other industries such as wineries, large brewers, and restaurants. However, craft brewing does have some unique liabilities that these others may not have, such as “tour liability.” There are also liabilities that are similar in type but differ in how drastically they may affect the brewery, such as boiler/machinery liability, supply chain liability, liquor liability, and workers’ compensation. While these exposures are common to related industries, the potential economic impact to craft brewing is different. Craft brewers are smaller (by definition), which magnifies the impact of any adverse occurrences. This changes the insurance coverages a brewer may need when compared with a similar industry.

Let’s take a look at some of the larger risks a craft brewer faces along with the type of coverages the brewery should obtain to minimize the financial impact of those risks.

Boiler/machinery liability

Boilers and machinery expose breweries to multiple liabilities. First of all, with production being reliant on machinery, any major breakdown could be devastating for business. When a brewery does not produce a lot of beer to begin with, even a temporary halt in production could have large consequences.

Along with a halt in production, brewers have the extra added risk of injuries if something more serious happens. An exploding boiler doesn’t just affect the production and finances of the brewery, but may also result in damages and injuries for workers, contractors, and tour-goers.

There are many steps that craft brewers can take to mitigate the potential economic impact of this risk. For the production side of the liability, brewers can obtain boiler and machinery coverage that will cover them for replacement or repair costs. Property insurance can also cover some of the loss of income from a breakdown in production.

Tour liability

One of the more interesting phenomena with respect to craft brewing is the great popularity of brewery tours, where breweries open their doors to the public (sometimes while the brewery is still in full operational mode). This serves craft breweries well as a marketing tool because it gets people in the door learning about and sampling the product. Popular tours sell out with regularity and have even become “must-see” tourist attractions in many cities. Macro-breweries have gotten in on the tour game as well. However, tours at larger breweries tend to avoid the production floor and tend not to include areas of the brewery that are currently operating.

With these production floor tours of active breweries comes unique liability. Paying customers are invited to walk around the brewery among the fermentation tanks and machinery (accompanied by a tour guide, of course). A brewer needs to make sure that conditions are safe for customers and take preventive measures.

In one specific case, a fermentation tank explosion during a tour led to customer injuries at a craft brewery in Texas.7 Not only was there an obvious halt in production in this case, but also two years after the incident, customers who were on the tour went to court for damages, citing pain and suffering as a result of the incident.

Brewers need to be covered for less “explosive” events as well. Slips and falls are a lot more likely, especially when the brewery tours contains stairwells and wet floors. Brewers must obtain general liability insurance with sufficient limits to cover the bodily injury caused to tour-goers or the potential property damage caused by them.

Liquor liability

In most cases, customers will also be drinking alcohol while on this tour. It’s well known that, while impaired, one is more likely to injure oneself. Brewers will need liquor liability coverage. This coverage insures brewers against claims resulting from their sales of alcohol. Clearly, any brewery offering samples or operating as a bar/brewpub must have this liability coverage.

What may not be as clear is what other circumstances require breweries to have this coverage. Some liabilities that may surprise prospective craft brewers arise when a customer leaves the establishment after being overserved and when the brewery decides to distribute its product through a food cart or participate in a festival. Liquor liability is not restricted to on-premises distribution.

Not only does liquor liability coverage protect brewers from those it serves beer to directly, but it also provides coverage for claims that can arise when their product is bought at a bar or liquor store. Claims for these liabilities usually arise when the brewer produces and sells beers with higher alcohol content.8

Supply chain liability

Beer (in its basic form) requires only four ingredients: water, malt (which is made from barley), hops, and yeast. If something interrupts the supply of any of these ingredients, it may result in lost sales, just as with equipment breakdown. These ingredients are not substitutable and are in all beers (with exceptions made for gluten-free beers). Small breweries are at a greater risk if there is a shortage of one of these ingredients, because typically, larger breweries will be able to pay a premium for the ingredients in the event of a shortage, though a craft brewer may not be able to.

In 2015, for example, heavy rain damaged the barley crop in Montana and Idaho. The damage to these crops was so severe that it made them unusable for brewing.9 As a result, beer prices went up the following year. Craft brewers need to be aware that this could happen to their suppliers and that they could be covered in these instances. Supply chain insurance can curb losses to the brewery by providing coverage for either loss of production or cost increases.

Theft

Brewers are liable to thefts during transportation. Clearly, theft of product is a risk that manufacturers of all sizes and products face. However, craft brewers must be especially cognizant of this risk because any theft of their product results in a much higher percentage of their total production than that of a larger brewery.

In one example, 3,300 cases of beer from a small, independent Atlanta brewery were stolen from refrigerated trucks. One beer that was stolen, a pineapple IPA, was already in short supply for the company at the time. The theft almost exhausted the brewery's inventory of this product.10 A single act of theft can wipe out a craft brewer’s product line, causing significant financial and reputational harm to the operation.

Spoilage liability

Spoilage may also have a very negative effect on a product line. Because beer is a perishable good, if not handled properly, it may spoil. Due to the specific process used to brew beer, the product is also subject to “infection.” In the beer world, “infection” generally refers to a strain of wild yeast that wasn’t intended to be part of the production. While not the same as “spoiling,” this yeast can lead to unwanted changes in the product, something to be avoided with a high-demand brew. In 2016, Goose Island had to recall two different releases because of infection, only to find that two upcoming releases were also showing signs of infection.11 While Goose Island, a larger brewer, may not have been dramatically harmed by the recall, a smaller company with only a few beers could be devastated by an event like this. Not only would it result in a costly recall of all the beers sent out, it could also result in a serious hit to a brewery’s reputation. Coverages for product spoilage can help partially recover lost profits and save a small company.

Intellectual property risk

Due to the explosion in the popularity of craft beer, it’s increasingly difficult for a craft brewer to stand out in the crowd. In fact, even finding a name for a beer (or brewery) is becoming a challenge. There are tens of thousands of beers on the market in the United States, and infringement on another brewery’s intellectual property (be it name, image, or font size) happens all the time. Generally, these situations are handled amicably due to the unintentional nature of the infringement, and can sometimes lead to collaboration and innovation between the breweries that came up with the same name.12 Other cases get ugly, resulting in cease-and-desists.

Making this more complicated is American trademark law, which buckets wineries, breweries, and distilleries together, making it even harder to come up with a unique name. Even imagery can be trademarked and protected by the law. Fighting trademark infringement lawsuits can cost significant time and money. While the standard commercial general liability policy does include copyright and trademark infringement protection in the event of “advertising injury,” infringement in other non-advertising activities would not be covered.

Insurance companies offer both “defense” policies for infringement cases and “pursuit” coverage. Pursuit coverage is designed to aid the policyholder in pursuing those infringing upon their intellectual property. This may be very valuable for a small brewery that is concerned that its patent rights may be infringed upon by a larger and better funded brewery. Without this coverage, the larger brewer may be more likely to infringe on the small brewer’s rights with the expectation that the small brewer may not be able to afford to defend itself.13

Closing

The craft brewing industry is very different from other commercial entities, even closely related ones such as larger breweries. The particular exposures discussed here require unique insurance solutions. Craft breweries need to ensure that they’re covered in the event of an interruption in their supply chain, a strand of wild yeast infecting their flagship beer, or even something as simple as a visitor slipping during a tour of the production floor. As with any small company, overlooking even the smallest risk can destroy years of hard work and maybe even an entire business.

Authors

Michael A. Henk, FCAS, MAAA

Rachel Neuville is a casualty actuarial intern at Milliman. She is an actuarial science, risk management & insurance student at the University of Wisconsin – Madison. She can be reached at reneuville@wisc.edu.

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